Pension lifetime allowance - ways to avoid?

gm0

The crystallisation example above is incorrect (or at least incompletely stated around income and drawdown method. 

If you take 250k tax free cash from £1m.  You have crystallised £1m. 100%ish LTA. And you have 250k in year tax free income. No income tax is payable. (FAD method). 750k is marked for income.  MPAA drops to 4k once you take the first £1 of income beyond the tax free cash.

By contrast if you took that 250k by UFPLS in one year (this is a bad idea) then you would get 25% of 250k tax free and pay income tax on the rest including a chunk of higher rate income tax and suffer the related impacts of being a higher rate band taxpayer. But you would indeed have crystallised 25% of the £1m pot and used 25% allowance.  Very few people would do that.

By contrast if you took a small slice with a UFPLS you would edge up the allowance from zero each year in say 5% slices 50k each year of which 25% (12.5k) is TFC and the rest is taxable with other income bands including nil rate as usual.  This is an optimal approach for many of us.  And it allows the allowance to grow (when the government index it which they sometimes do and sometimes don't).  You have an unused % of whatever the allowance is at the time as you go along.

Ah but wait.....the age 75 tests are coming to get ya.  BCE5A/5B

Around the LTA pot value scenario is where the first FAD method can be superior. This is despite the IHT "risk" of having the tax free cash in your estate.  Why ? Because it allows the money to grow in an S&S ISA (or indeed your spouse or childrens S&S ISAs subject to 7 year PET IHT rules. Do some levelling out.

There is no LTA penalty on growth in any form of S&S ISA today.   That same money if allowed to grow uncrystallised for nearly 20 years in the pension while you nibbled away 5% per year with UFPLS is then still subject to the LTA rules - no TFC above the limit and a 25% charge for amounts above the limit. Insultingly the penalty 25% may be on inflation if the allowances have been frozen (as they have been recently).

Caveat emptor.  Read and understand the BCE rules.  There are magnum opus threads on MSE where various of us have built and corrected our understandings and strategies. 

coyrls

How have you managed to hold Bitcoin in a pension?

Marcon

You can artificially increase the LTA by up to £30,000 by having 3 different 'small pots' each of no more than £10,000 and cashing them in at any time from age 57 (unless the minimum age for access to private pensions increases) under the 'small pots' regime which uses 0% of your LTA and doesn't trigger the Money Purchase Annual Allowance if you want to contribute more than £4K per year. You need to cash in the whole small pot; 25% is tax free, 75% taxable at your marginal rate when you cash it in.

AndrewB22

Within a few years there will be quantum computers that can instantly crack the blockchain encryption and bitcoin, ethereum and all other current technology crypto will be worthless. 

But I do have some tulip bulbs, if that helps?  And a tremendous roulette system.

Simon11

Pablo7474 said:

Adrian_Bond_007 said:

For what it's worth - I have a good blend of uranium miners, gold and silver miners, BTC miners, BTC and Ethereum. Not exactly a risk free pot some might

I would be more concerned about the pot going to zero than worrying about the potential LTA charge! Good luck!

My thoughts too and the opening poster seems to have his head in dreamland. Bitcoin down 30% in just the last month and all over the place.

I would focus my energy on having a back-up plan in case Bitcoins become worthless and you have no pension, as you don't indicate that you have another pot?

If the Bitcoin is very successful, I personally would be very happy with paying the LTA tax and wouldn't worry!

But if it isn't successful, you are truly buggered

Adrian_Bond_007

gm0 said:

The crystallisation example above is incorrect (or at least incompletely stated around income and drawdown method. 

If you take 250k tax free cash from £1m.  You have crystallised £1m. 100%ish LTA. And you have 250k in year tax free income. No income tax is payable. (FAD method). 750k is marked for income.  MPAA drops to 4k once you take the first £1 of income beyond the tax free cash.

By contrast if you took that 250k by UFPLS in one year (this is a bad idea) then you would get 25% of 250k tax free and pay income tax on the rest including a chunk of higher rate income tax and suffer the related impacts of being a higher rate band taxpayer. But you would indeed have crystallised 25% of the £1m pot and used 25% allowance.  Very few people would do that.

By contrast if you took a small slice with a UFPLS you would edge up the allowance from zero each year in say 5% slices 50k each year of which 25% (12.5k) is TFC and the rest is taxable with other income bands including nil rate as usual.  This is an optimal approach for many of us.  And it allows the allowance to grow (when the government index it which they sometimes do and sometimes don't).  You have an unused % of whatever the allowance is at the time as you go along.

Ah but wait.....the age 75 tests are coming to get ya.  BCE5A/5B

Around the LTA pot value scenario is where the first FAD method can be superior. This is despite the IHT "risk" of having the tax free cash in your estate.  Why ? Because it allows the money to grow in an S&S ISA (or indeed your spouse or children's S&S ISAs subject to 7 year PET IHT rules. Do some levelling out.

There is no LTA penalty on growth in any form of S&S ISA today.   That same money if allowed to grow uncrystallised for nearly 20 years in the pension while you nibbled away 5% per year with UFPLS is then still subject to the LTA rules - no TFC above the limit and a 25% charge for amounts above the limit. Insultingly the penalty 25% may be on inflation if the allowances have been frozen (as they have been recently).

Caveat emptor.  Read and understand the BCE rules.  There are magnum opus threads on MSE where various of us have built and corrected our understandings and strategies. 

Thank you very much for this. Its a good strategy to maximise income without getting hit with punitive taxes. 
You are also very right ref pension. Whilst my SIPP is doing well, my ISA is largely neglected - If I could find a way to invest in some of the products I want then I would bite the hand off anyone offering it. alas - its almost worthless by comparison at present - I will aim to fix this funding gap asap. 

Its very clear to me now, that I woefully misunderstand the LTA, and will need some professional help in the future should I be lucky enough to come close (or even exceed it). With inflation running so hot - I would think that this LTA becomes a hot topic soon as £1m simply isn't a lot of money anymore. The fact that a cap exists is stupid imo anyway. 

E.g. why not just stop any tax relief once the value hits £1m so people can still grow the pot? The LTA seems to be a punishment instead of an incentive. I expect many highly paid employees will find out the hard way the damage it can do to your retirement livelihood; especially highly paid Drs, Surgeons etc who were coaxed out of retirement during Covid.  

In response to the comments ref Bitcoin - yes its highly volatile. Yes it could go to ZERO. DYOR please - its something special once you understand it. (takes about 100 hours and you will be much better informed than 99% of the investing population). Dropping hate bombs on a asset that you don't understand isn't smart. 

I do have contingencies (a small employer contributed pension), plus i own 2 rental properties (personal and ltd company), whilst also being the owner of 2 smaller companies that could funnel away a fair bit of money into a SIPP should it all go to nothing. One is already feeding my sipp £200 a month gross as director. 

So i think on a calculated risk balance - I'm very much in the highest category - but with a solid backup (i hope) should it all go to nowt. 

Thank you all for your responses. Its really appreciated 

Ade

redpete

Adrian_Bond_007 said:

I guess I'm at the mercy of governments who seem hell bent on punishing good investment and prudent saving.

'hell bent' apart from allowing you to save up to 40% tax on contributions you make and receive tax free whatever contributions the employer makes.

Albermarle

why not just stop any tax relief once the value hits £1m so people can still grow the pot? The LTA seems to be a punishment instead of an incentive. I expect many highly paid employees will find out the hard way the damage it can do to your retirement livelihood; 

Many people with a Million Pound pot will have benefited from very generous 40% tax relief. IF they go over a Million, the govt effectively  takes the tax relief back for money over the Million ( not below it ) . The LTA is there to stop wealthier people benefiting too much from generous tax relief.

For sure it is a bit clunky, and may have been better to restrict the tax relief more in the first place, but the end result would be largely similar. 

When there are generous tax breaks in place, there has always got to be a mechanism to stop then being abused/overused.

Grumpy_chap

Adrian_Bond_007 said:

With inflation running so hot - I would think that this LTA becomes a hot topic soon as £1m simply isn't a lot of money anymore. The fact that a cap exists is stupid imo anyway. 

E.g. why not just stop any tax relief once the value hits £1m so people can still grow the pot? The LTA seems to be a punishment instead of an incentive. 

There are many tax thresholds that many would describe as "stupid".  Many of those tax thresholds fail to keep pace with other parameters.  It is a trick that the thresholds are brought in at a level that only catches "the rich" and therefore not too much opposition but, in order to actually raise tax, the threshold has to slowly encompass "the common man".

I will be happy to be corrected but, AIUI, you can still contribute (with tax relief on the way in) above the LTA or grow the pot above the LTA and the effect is that the tax on the way out counterbalances that input relief but you don't end up having paid more tax overall.

MallyGirl

There were some great posts with useful info on my LTA Basics thread:

https://forums.moneysavingexpert.com/discussion/6294316/lta-basics/p1